Yanking The Bank Of Japan's Chain - "It's Basic Math, Stupid!"

Authored by EconomicPrism's MN Gordon, annotated by Acting-Man's Pater Tenebrarum,

Mathematical Certainties

Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70 years.


Growing wrinkle coefficient… as the global population increasingly ages, the “pay-as-you-go” social security and pension Ponzi schemes of developed welfare states are inexorably careening toward insolvency. [PT]

In other words, the post-World War II boom is nearly over and the bills are coming due.  What’s more, greater and greater amounts of future growth are already claimed by existing debt obligations.  This, in turn, inhibits that growth from making its way into the larger economy, thus limiting future economic growth.

Perhaps this is why mature economies are finding it near impossible to attain 3 percent GDP growth.  In fact, the last time U.S. GDP grew by 3 percent or more for a calendar year was 2005, about 12 years ago.  Unfortunately, it doesn’t look like U.S. GDP growth will ramp up any time soon.

Over the last 12 years, GDP growth in the European Union has been equally lethargic.  However, Japan takes the cake.  GDP growth in the Land of the Rising Sun has been stuck in a quagmire for 25 years.


US annual GDP growth rates since 1949 – average output growth has consistently declined, while both public and private debt exploded into the blue yonder. [PT] – click to enlarge.


Fighting the Forces of Arithmetic

Aside from a generation of GDP growth stagnation, Japan also has another important distinction.  The country is serving as the canary in the coal mine for what happens to an economy that has a rapidly aging population, burdensome debt obligations and stagnating growth.

Specifically, Japan’s disagreeable demographic trend generally leads the trend in the European Union by about 5 years and that of the United States by roughly 9 years.  Japan’s worrisome debt and growth trends lead those in the European Union and the United States by about 15 years, give or take.  The simple arithmetic Japan faces, as reported by the Daily Times, includes:

“Japan’s $4.8 trillion economy is carrying a $10 trillion-plus debt load amid tepid growth, deflation and shrinking population, one expected to fall by about one-third by 2065. Unless Tokyo suddenly learns to grow 8 percent or more for many years to come and a level of fiscal sobriety it hasn’t exercised in decades, it can’t pay that debt.”

Yet the Japanese government and its central bank, the Bank of Japan (BoJ), can’t be faulted for lack of effort.  They’ve been at the cutting edge of executing policies aimed at fighting the forces of arithmetic for several decades.  So far it has been a losing battle, resulting in slow growth and runaway debt.


The “success” of implementing Keynesian and monetarist recipes in Japan to the hilt. In the past 17 years, nominal GDP is up 54%, government debt has nearly quadrupled and the central bank balance sheet is up 11.5-fold relative to economic output. This reflects the definition of insanity often ascribed to Einstein: doing the same thing over and over again and expecting a different result. [PT] – click to enlarge.


Yanking the Bank of Japan’s Chain

In today’s age, where expedient solutions are demanded, BoJ Governor Haruhiko Kuroda is compelled to do something.  But what? He’s already borrowing money into existence and plowing it into the stock market via exchange traded funds (ETFs) at an annual rate of $53 billion.

What this does to improve the real economy is unclear.  But like all types of depravity, the BoJ is finding these asset purchases are much easier to start than to stop.

As of April 2016, the BoJ was a top 10 shareholder in about 90 percent of Nikkei 225 companies.  Moreover, at their present rate of ETF buying, the BoJ will be the top shareholder of 55 Nikkei 225 companies by the end of the year.  What to make of it?


Introducing socialism through the backdoor: the BoJ owns an ever larger share of Japan’s  stock market capitalization, by buying up ETF shares with money it literally creates from thin air. This absurd activity did succeed in boosting Japan’s money supply growth for a while, but wealth can possibly be increased by printing money. If that were possible, we could all just stop working and simply cash a central bank check every month. Allegedly the BoJ “must” do this in order to “increase inflation” (meaning: boost consumer prices). How society is supposed to benefit from things getting more expensive rather than cheaper as they would in a progressing free economy was never satisfactorily explained.  There is neither sound theoretical support for this nonsense, nor does any empirical evidence to this effect exist – in fact, the opposite is true. [PT] – click to enlarge.


To start, this has had the direct effect of distorting stock market prices.  In addition, the BoJ’s stock purchases can be thought of as a form of transfer payments to corporations and the wealthy.  If corporations and the wealthy are getting direct funding via BoJ cheese, shouldn’t the common people?

These, no doubt, are the sort of unacceptable questions that come up when the rules of monetary policy are continually adjusted toward the expedient. 

Naturally, when a country goes down this slippery road to hell there is always an endless supply of expedient solutions.  So, too, there is always an endless supply of crackpot economists to offer the next policy fix.

For example, Gabriel Stein of Oxford Economics has a novel solution to Japan’s perceived “demand problem”.  Since 2014 he’s been advocating that the BoJ pay Japanese citizens to shop:

“Instead of funding the deficit, you could credit bank accounts every year to get people to start spending.  Put money into the hands of people, not banks, and you will end deflation.”

Stein proposes BOJ-sponsored cash cards credited at about $8,000 or more per citizen.  These cash cards would expire at the end of each year, so that households would be forced to consume.

Could there be a more perfect economy?  You get free money from the government that you can use to buy real stuff.  Obviously, something doesn’t add up. Come on now Mr. Stein.  You don’t think Kuroda just fell off the turnip truck, do you?  Stop yanking his chain.


This turnip truck?


SafelyGraze MisterMousePotato Sun, 08/06/2017 - 14:41 Permalink

"Gabriel Stein of Oxford Economics has a novel solution ... pay Japanese citizens to shop"that is amazingly novel!The Cloward–Piven strategy is a political strategy outlined in 1966 by American sociologists and political activists Richard Cloward and Frances Fox Piven that called for overloading the U.S. public welfare system in order to precipitate a crisis that would lead to a replacement of the welfare system with a national system of "a guaranteed annual income and thus an end to poverty"  https://en.wikipedia.org/wiki/Cloward–Piven_strategyhugs,the paperny familyhttps://en.wikipedia.org/wiki/Frances_Fox_Piven#Life_and_education  

In reply to by MisterMousePotato

Let it Go Sun, 08/06/2017 - 14:28 Permalink

In many ways, Japan highlights how a country can cruise along for a long while because they did a few things well in the past. The myth promoted by the central banks that a major currency cannot fail is accepted as fact by many people however, the rapid demise of either the yen or the euro is all that will be needed to reveal the truth. When a major currency fails it will remind people everywhere that our system of fiat money is held together only by faith in the system and a prayer.Japan's public debt, which stands at around 250% of its GDP is the highest in the industrialized world. In the future Japan's debt can only be addressed by printing more money and debasing the yen. The article below explores how when Japan crumbles it will be felt across the world. http://brucewilds.blogspot.com/2016/06/the-yen-and-its-failure-to-fail.html 

Doom and Dust Sun, 08/06/2017 - 14:45 Permalink

No moron, Japan hasn't had a lost decade or two of stagnant growth. In fact real wages have grown faster than the US and GDP per capita is at its highest level ever.Japan alone among industrialised nations didn't buy into the mass immigration demographic ponzi scheme. Its population may be slowly reduced but that actually promotes income growth in real terms, as well as robotisation, social harmony and security.

GooseShtepping Moron Sun, 08/06/2017 - 14:45 Permalink

I'm sorry to disagree here, but Pater Tenebrarum (I love that name, by the way) is missing the point. All of that Japanese "Keynesianism" was never intended to grow their economy. It's purpose was not economic at all. The purpose was to protect the nation from losing its identity, and at that it has succeeded.Japan will sacrifice whatever it takes to prop up their zombie corporations because they view this not as economics but as war, and defending the corporations are akin to defending the country's borders. Wars are costly and wasteful; they are not optimal for "growth." But there isn't going to be any growth anyway, and they know this. Japan is positioning itself to defend its slice of a shrinking pie. That's why, in 100 years when none of this is remembered anymore, there will still be a Japan and there will not be a USA.

fattail Sun, 08/06/2017 - 15:14 Permalink

"How society is supposed to benefit from things getting more expensive rather than cheaper as they would in a progressing free economy was never satisfactorily explained."  When your economy is built on a continually increasing credit base, the ability to service that debt is made easier by the devaluation of the currency.  Correspondingly the value of the collateral, usually real estate, will increase in nominal terms and the margins required for that credit can be smaller if the devaluation of the currency can be counted on to protect the bank's collateral margins and provide an underlying base nominal value of the collateral.  This makes issuing credit easier and stimulates the viritual positive feedback loop of credit growth and economic growth.The predicament now is that deflation is embedded in the system, with the only prescription being the management of its effects as there is no solution.  Deflation is embedded with the demographics predicament, debt load(federal, state, including pensions, local, consumer), deleveraging, and technology all contributing to the disinflation/deflation predicament. See James Rickards

squid U4 eee aaa Sun, 08/06/2017 - 20:09 Permalink

Its isn't a bad thing.....if you're solvent.On the other hand, if you have debts or assets that are someone else's debts then defaltion is a path to the soup line. Debts are nominal in a deflating wages environment. You're $1200 mortgage payment will not go down with your wages or the price of food or the equity of your house. The payments on that car, the house, the boat, etc....stay while the value of the underlying asset falls.....it doesn't do wonders for the back's balance sheet either. Which is why the FED doesn't want to see inflation. Squid

In reply to by U4 eee aaa